Origin on fire after NZ deal

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Origin Energy shares jumped 34¢ - 5.9 per cent - yesterday to close at a record $6.14 after the company announced it had agreed to pay $NZ1.67 billion ($A1.5 billion) for 51.2 per cent of Contact Energy.

The deal to buy from the troubled Edison Mission Energy group a majority stake in New Zealand's largest integrated energy company is subject to permission from NZ regulators.

The takeover would create a new Australasian energy giant and give Origin a victory over competitor Australian Gas Light Co, which also bid for Contact.

The offer made to Edison Mission will also be made to Contact's minority shareholders, but is unlikely to find much support as it is pitched below recent trading levels.

Analysts said they did not believe Origin wanted to gain more than 51.2 per cent of Contact, as that would give it control and ensure gearing ratios did not blow out.

Origin managing director Grant King said the recommendations of independent directors would determine likely acceptances by minority shareholders.

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If Origin were to win 100 per cent of Contact, the deal would cost $NZ3.3 billion, the gearing ratio would rise to 53 per cent and the company would probably have to raise equity, Mr King said.

If Origin gained only 51.2 per cent, gearing would be a comfortable 43 per cent, compared with under 35 per cent now.

He said Contact was performing well.

It had a "strong position in generation and retail and needs to improve its position in upstream gas production".

Origin, he said, had a similar profile but was strong in upstream gas and needed to improve its position in generation. The purchase gave Origin an opportunity to grow and strengthen cash flow.

NZ electricity tariffs had risen 10 per cent a year for the past three years because of tight supply and this situation was not expected to change quickly, as higher prices were necessary to encourage new generation, Mr King said. Therefore, Origin was confident that Contact's earnings growth in the next few years was adequately underpinned.

He said that gaining a controlling interest in Contact, NZ's third-largest listed company, would add 600,000 retail customers to Origin's 2 million, add 3780 megawatts of generation to 883 megawatts and lift revenue 32 per cent.

Origin, which recently bought 50 per cent of NZ's Kupe gas fields, would be able to use its exploration experience to find more gas in that country, he said.

Citigroup analyst Sanjay Magotra said that while Origin, which traded at 18 times earnings, had paid 23 times earnings for Contact, the deal was not overpriced, because NZ accounting measures pushed pricing ratios artificially higher.

Mr Magotra said Origin's growth opportunities were limited in Australia and the deal would create opportunities.